Australia’s retail revolution has lessons for UK

First thing in the morning on November 20 2007, Richard Goyder, chief
executive of Wesfarmers, and I walked through the front door of the vast
Coles Headquarters in Melbourne, Australia, known then as “Battleship
Galactica”.

Housing estates are springing up around cities such as Sydney and they need new supermarkets

Wesfarmers had just become the new owner of Coles after a prolonged A$19.7bn (£13bn) takeover battle. For 10 years, this iconic Aussie brand had underperformed.

A bloated head office and poorly managed, every aspect of the business was in decay.

To say the least, it was a bold acquisition.

Astonishingly, there was no one to greet the new owner. Instead, we struggled through reception, past the wall of security gates, through a labyrinth of corridors, past listless staff clutching papers, and into a large, suitably grey, auditorium. Slowly, people started filtering in. Seemingly there was no urgency, no jubilation, and not much fear, either. Like with many failing businesses, it was another day, another new management.

Wesfarmers could have been forgiven for thinking, “What have we bought?”. A Merrill Lynch analyst commented: “We doubt whether Wesfarmers (or anyone else for that matter) has the capability to turn this business around.” While Morgan Stanley said: “Wesfarmers will bleed if it takes over Coles.”

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Under the leadership of the avuncular Scottish genius Ian McLeod, with his brilliant team of Anglo-Aussies, profits have more than doubled.

For 48 consecutive months, the business has outperformed its major competitor, Woolworths. Like-for-like growth has been running at levels that UK supermarkets can today only dream of. More than A$2bn of free cash flow has been returned to Wesfarmers, huge value created for shareholders. Prices have been reduced for Australian consumers and the quality of fresh food increased with huge changes in the standards of produce growing and animal husbandry. It is probably the best performing global Top 30 food retailer over the past five years.

The Australian experience is a salutary reminder of how much things can change. When I was at Asda during the turnaround period from 1992, for eight consecutive years our like-for-like sales ran at 4pc to 6pc. If they fell below that level for a week there was a searing inquisition around the boardroom table. We went from fourth to second in the food retail market. Tesco stormed to the top of the table and embarked on global expansion. Morrisons enjoyed its golden era under Ken Morrison. Shareholders were happy.

We were the kings of retail. Australia was a far off place with far behind supermarkets.

So what happened to make Australia the place to be? First, of course, it helps to have a growing economy. It is not just the climate in Australia that is sunny. It is a younger country with a growing population. Although consumer spending has been sluggish, in tough times Australians save a lot so spending declines.

But it is not like the UK with its triple-dip recession and muted prospects for the future. Vast new housing estates are still springing out of the countryside around Australia’s great cities and they need new supermarkets.

Second, the Coles recovery has been a lot about catching up. When we bought the business, the stores were dirty, the shelves were cluttered, queues were long and the head office bureaucratic. Typically, fresh produce was seven to eight days old by the time it arrived in the store and shops held more than five days’ worth of stock. No wonder the independent greengrocers and butchers in Australia were thriving.

Now, days have been cut from the supply chain and new high-quality growers and farmers are thriving on the back of Coles’ success.

The retail revolution – better, fresher chilled products, quality own-label goods, fast supply chains – has still got years to run in Australia.

Finally, retail is about people and leadership. Wesfarmers had the wisdom to recruit a world-class team, persuading people to cross the world, risk their careers and move families to make it work. The burning platform they inherited has created an energy and drive that is difficult to replicate in well-performing, established businesses.

Meanwhile, while Australia catches up, there has been a sea change in the economic landscape in the UK. Looking back, the big supermarket chains enjoyed an extraordinary 25-year ride from 1980 to around 2005. Propelled by the growth of chilled ready meals, fast supply chains, global sourcing, the industry changed the way people lived, and flourished as a result. But there is no inherent reason why selling food should be a growth business. Innovation has slowed and new threats arisen. That era is well and truly over.

Far from growing in the past year, most large food stores in the UK saw a decline in their sales. Such a result was inconceivable 10 years ago. The recent Christmas trading results were greeted with ritual whoops of triumph or sullen despair. But there was not much between the major chains and all are seeing real-term declines in the core business. Take out online and convenience and they are going backwards.

The UK leads the world in online food shopping and home delivery. This may be a source of pride, but it is not a financial blessing. A few years ago, home delivery was a piece of research and development. We found that there was almost infinite demand for it. The problem is that the most costly part of food retail is the part the consumer does. Selecting from a range of 40,000 items and carrying it to your car to drive home. It is very hard to make it profitable.

This week, Sir Stuart Rose has taken up that challenge at Ocado, a pioneering business unique in the world that delivers excellent service with state-of-the art logistics systems. So far, it has succeeded in the face of a wall of scepticism and, if it starts to generate a return, it will be an extraordinary triumph for Tim Steiner and his team. The problem for the established retailers is even more profound. If the new online business can get into the black, it will eat the profit of the established supermarkets.

Food retail tends to move in fashions and the second flavour of the month is convenience. The trouble is that convenience stores, while more profitable than online, are still less profitable than the large superstores. They need higher prices to make money, create complexity in the supply chain, and still cannibalise (to an extent) the old business.

So the industry in the UK is now facing some unassailable truths. Whichever way you look at it, the golden era is over. And to be clear, this is not because of management. On the whole, the quality of management is better than it has ever been and better than in my era. But the landscape has changed. This is a mature industry with utility-like growth prospects and static, maybe even declining, returns.

So what should we derive from this glum conclusion? First, to worry about returns to shareholders. In the golden era we could justify huge amounts of capital spending to create splendid new stores. Cash returns were for the future. All the major UK food retailers, including Asda, have huge amounts of embedded property. But this capital intensive, low-return model now needs rethinking. In Australia, Coles owns almost no property other than that which is held for development. As a result, the return on assets and new investment is higher.

Second, online and convenience is not an imperative. Just because it works for some, does not mean it works for all. Simplicity, value, speed and innovation will still create better returns than being the third or fourth best at a less profitable format.

And finally “time and place” account for a lot in business. Growing businesses in growing countries make everyone look like a hero. I would rather be in Australia!

Archie Norman is chairman of ITV. He advised Wesfarmers on the acquisition of Coles, of which he became a director.